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Ensure your pension reaps its full reward

There are a range of small tweaks that pension customers could make to potentially save millions of pounds, rather than the pension companies or the tax man benefiting. Peter McGahan investigates.

Personal pensions, or any pension for that matter, are about as exciting as getting a limited edition, extended, uncut DVD of a Halifax advert for Christmas.

That said, pensions are one of the biggest investments we will ever make, yet we have the most amazing apathy towards them.

They are already complicated and have just become much more so and for most of us, the words we associate with pensions are charges, commission and losing money. Perhaps it's not so amazing why we have so much apathy then.

The financial downturn has had a big impact on pension planning, shoving it right to the back of most people's minds as they focus on day to day living.

There are a range of small tweaks that pension customers could make that will potentially save them millions, rather than the pension companies or tax man benefiting.

Top tips

First of all approach a good Independent Financial Adviser who offers you a fee option to assess your pension. Because the adviser is fee-based there will be no motivation for them to simply turn your pension over to make a quick commission buck and the unscrupulous will always find a reason.

Charges: You might think your pension provider will call you to let you know their new products are a tenth of the price of their old one (that's the one you have), but they won't.

You might hope they'll tell you that if you were to die before taking the pension that you may only get your premiums returned rather than the fund value and potentially lose thousands, but they won't. That happened to a reader of this column whose husband died and the final death value of the pension was half what it actually was worth the day before he died.

Perhaps you might think they'll tell you that instead of being invested in the actual fund you believed you had chosen, you were invested into a copied version of it, a version that might cost you as much as 12% per year in lost performance. Those investors buying a fund like 'AIG Fidelity special situations' as opposed to 'Fidelity special situations' should view what will be an alarming graph showing the difference in performance.

Perhaps when the marketing department is telling you about your guaranteed annuity inside your pension, they might tell you that it's only a guaranteed annuity at the high rate if you take the pension as single and with no increase after retirement. In other words, if you died soon after taking your pension, your spouse would receive nothing and also if you lived longer the pension would not be increasing with inflation. Ten years after taking your pension it could be as much as a third less if inflation averaged 3%. Perhaps they might tell you this or perhaps not.

Perhaps when your pension is about to mature, your pension company will advise you that you could use the fund you have built up and go to another pension company to buy yourself the best income. They might even let you know if your health had deteriorated that you could actually get an enhanced income with someone else. Perhaps not.

Maybe in a moment of weakness they might show you that most of their funds do not outperform an index (like the FTSE100) and are basically an expensive copy of that index.

In my column a few weeks back I showed that many funds simply have much of the same stock in their portfolios as each other.

Go to any fund comparison site and have a look at the top ten holdings in the big pension funds. You'll see they are pretty much the same. It's an expensive way to have a virtual index tracker, but they would tell you that wouldn't they?

Hardly. Every key point above should be covered in a pension review by a fee based adviser and every day goes by is an expensive one.

By Peter McGahan

Need Expert Advice?
Peter McGahan is an Independent Financial Adviser and Managing Director of Worldwide Financial Planning. Worldwide has won 16 Financial Times awards in the last four years. Peter has also been named the top media IFA of the year by Unbiased.co.uk in 2009.

Peter comments regularly in major journals such as the Mail on Sunday, Irish News and Sunday Times and is a weekly columnist for FT Adviser. He has also appeared on Working Lunch and the Today programme. In addition he is an expert on international tax matters for a range of international publications.

Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'

Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made. The above represents the personal opinions of Peter McGahan. All information is based on understanding of current tax practices, which are subject to change. The value of shares and investments can go down as well as up.

If you have a financial query you would like Worldwide Financial Planning to respond to, call 0845 230 9876 or email info@wwfp.net.